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  • 6. Compliance engagement

    Liabilities

    In 2020–21, GST liabilities raised through client engagement activities (including the GST compliance program) were $2,339 million (excluding penalties and interest).

    Table 15: Compliance liabilities

     

    2016–17 $m

    2017–18 $m

    2018–19 $m

    2019–20 $m

    2020–21 $m

    GST liabilities raised

    2,895

    3,014

    3,173

    2,645

    2,339

    GST liabilities raised – business as usual

    1,791

    1,809

    1,504

    1,077

    1,241

    GST liabilities raised – compliance program

    1,104

    1,205

    1,669

    1,568

    1,098

    In previous years, large case adjustments exceeding $20 million in GST were included in the table above and were not reported separately. Due to the significant amount of GST outlier liabilities in 2020–21, we have reported these separately.

    Table 16: Compliance liabilities and cash collections – including outlier cases

     

    Liabilities raised $m

    Cash collections $m

    Total GST liabilities – includes business as usual and compliance program

    2,339

    1,835

    Outlier cases

    2,487

    2,189

    Total – including outlier cases

    4,826

    4,024

    Note: Estimated cash collections (including penalties and interest). Outliers that fall into the extreme or nonsensical categories are excluded from reporting.

     

    Outlier cases can arise due to various reasons. Some examples from 2020–21 include:

    • identity (ID) fraud – where a person has tried to use someone else’s ID to claim major refunds
    • a refund fraud case – where a fraudulent BAS resulting in a large refund was lodged; the client later stated they were having a medical episode at the time of lodgment
    • clerical errors by taxpayers or their advisers – where clerical and transpositional errors lead to incorrect amounts being reported.

    GST compliance program

    The GST compliance program was established in 2010. The different iterations have been a significant part of the ATO’s resourcing and GST administration results, returning approximately $11 billion in GST revenue to the states and territories through to June 2021.

    The ATO has been provided with additional funding, extended through to June 2023 to ensure the following objectives are met:

    1. Taxpayers are correctly registered – Coverage to ensure clients were correctly registered was achieved. Revenue commitments of $13.1 million was not met due to resources being directed to higher priority and higher revenue risk work.
    2. Correct reporting is focused on tackling refund exploitation and dealing with systematic or deliberate under-reporting of GST – Compliance activities raised $509.1 million, significantly exceeding the target of $283.9 million. As we transitioned out of one of the COVID-19 phases and impacts and the administration of stimulus measures, this strategy maintained a focus on pre-issue reviews for high-risk GST refunds and the detection of fraudulent behaviours. Analytical risk models have remained effective in detecting suspect refunds, with strong revenue results achieved from several high-risk refund cases.
    3. Large businesses pay the right amount of GST: Justified trust program – Revenue commitments were met with $178.7 million raised against a planned commitment of $132.2 million. The justified trust program is detailed below Table 17.
    4. More direct contact between the ATO and non-lodgers – Lodgment compliance activities raised $410.5 million against the planned commitment of $225.5 million.
    5. More direct contact between the ATO and taxpayers with a GST debt – GST debt recovery activities returned $335.5 million against an annual commitment of $244.4 million. In response to COVID-19 restrictions, external collection agencies (ECA) referrals ceased in March 2020. In lieu of ECA referrals, an additional 260 outsource staff were employed from February 2021 to undertake outbound telephony debt and lodgment work.

    These objectives are managed through 12 strategies, as stated in the GST compliance program 2019–23 bid papers. All strategies funded by the program were disrupted and impacted to some degree by COVID-19. This resulted in fewer activities in the first half of 2020–21, with rolling lockdowns continuing to significantly impact all deliverables.

    In 2020–21, GST compliance and lodgment enforcement activities raised total liabilities of $1,098.3 million, exceeding the commitment of $654.7 million by $443.6 million.

    The strategies and compliance liabilities raised within the objectives are detailed in the table below.

    Table 17: GST compliance program strategies and liabilities raised

    Strategy number

    Key objective

    Strategy description

    GST $m

    1, 11

    4

    Lodgment compliance activities to ensure taxpayers that are required to lodge are lodging, promoting fairness and confidence in the system; to address declining performance of quarterly BAS lodgment, predominately for the small and micro segments.

    410.5

    3

    1

    Ensure taxpayers are correctly registered in key risk areas such as GST registrations, deferred GST, and associated account integrity.

    -

    4

    2

    E-audit capabilities to more efficiently and effectively analyse taxpayer-provided data.

    20.3

    5

    2

    Correct reporting tackling refund exploitation to detect, address and deter GST incorrect reporting and GST refund fraud.

    414.9

    6(a)

    2

    Detect and deal with the most egregious taxpayers who seek to hide or avoid GST to obtain an unfair advantage.

    73.9

    6(b)

    5

    Investigations and prosecutions action that sends a strong message to the community of the high risk of being detected and the consequences of non-compliance behaviour.

    -

    7

    5

    Dispute resolution leading to the prevention or early resolution of disputes under objection.

    -

    8

    All

    Risk and strategy resourcing to assess risk to the GST system, and determine the most appropriate strategies for the resources available.

    -

    9

    All

    Program management, effectiveness, and GST gap research to better understand influences on the GST gap and international benchmarking across jurisdictions.

    -

    10

    2

    Improve risk models to take advantage of technology and better use of data.

    -

    12

    3

    Large business compliance to provide greater assurance that large public, multinationals and private businesses are meeting their GST obligations (justified trust).

    178.7

    Total

    1,098.3

    2

    5

    Prevent and reduce GST debt arising from compliance program outcomes achieved.

    335.5

    Justified trust

    Under our justified trust program, we undertake specific tax assurance engagements with:

    • the Top 100 and Top 1000 public and multinational businesses
    • the Top 500 privately owned groups where we apply the justified trust methodology.

    The justified trust program seeks assurance that large clients are reporting the right amount of GST. To achieve justified trust, we seek objective evidence that would lead a reasonable person to conclude that a client paid the right amount of tax. Justified trust does not provide absolute certainty that the entity is complying with all its tax obligations and the amount of tax paid is completely accurate, as we recognise that obtaining this level of certainty is not practical.

    Justified trust reflects a level of evidence-based assurance that the entity is complying with its tax obligations within the materiality threshold.

    Top 100 and Top 1000 programs

    We undertake specific tax assurance engagements with the Top 100 and Top 1000 public and multinational businesses. The integration of our approaches to implement the justified trust work program from a whole-of-client and multiple tax perspective continues with a focus on:

    • GST governance
    • determining the extent of creditable purpose
    • reduced input tax credits
    • reverse charges
    • food classification
    • correct reporting.

    Incorrect reporting from inadvertent errors is one of the main GST risks identified through the assurance reviews. Most GST amended assessments in the large market are the result of voluntary disclosures arising from processing or system errors.

    The GST Analytical Tool (GAT) is applied in Top 100 and Top 1000 GST assurance reviews and provides a strategic, top-down view of a taxpayer's GST performance. It is used to identify and understand key variances between accounting figures reported in audited financial statements and GST reported in BAS.

    The application of the GAT is an important element in assuring the GST outcomes of taxpayers in our reviews of Top 100 and Top 1000 taxpayers who are predominately in the taxable supply industry.

    We encourage taxpayers to embed the GAT in their governance framework as it provides a check as to their GST outcomes. Taxpayers have found benefits in applying the GAT to their systems, and they have subsequently picked up issues and made changes to improve correct GST reporting.

    Through improved governance, and clients undertaking more regular and robust data and transaction testings, we expect to see fewer inadvertent pre-lodgment system errors. The GST Governance, Data Testing and Transaction Testing Guide and the Guide to Independent Data Testing by Third Party Advisors will support our GST assurance reviews in the Top 100 and Top 1000 populations.

    Top 100 program

    GST and income tax teams work collaboratively to deliver justified trust assurance reviews across both taxes under the Top 100 program. Some GST reviews were delayed due to COVID-19. As of 30 June 2021, 19 Top 100 GST assurance reviews were completed, with 26% attaining an overall high level of assurance and 74% attaining an overall medium level of assurance.

    Top 1000 program

    GST and income tax teams work together to deliver combined assurance reviews that cover both taxes, and dedicated GST teams deliver GST streamlined assurance reviews. As of 30 June 2021, nearly 100 combined assurance reviews and 128 GST streamlined assurance reviews were completed, with 21% attaining an overall high level of assurance and 74% attaining an overall medium level of assurance.

    Top 500 GST program

    We have sought to obtain assurance over private groups GST obligations to provide confidence they are paying the right amount of GST, applying the justified trust methodology in a manner tailored to this market.

    Under this program, we commenced integrated engagements to obtain confidence for both GST and income tax obligations of each private group. The integrated approach delivers a whole of tax approach within a single client experience, and enables the GST assessment to form part of the client’s overall justified trust assessment. In 2020–21, we also finalised assurance reviews which were non-integrated from the client experience perspective, where the GST assurance review may not have been conducted concurrently with the income tax assurance review. All future new engagements will be integrated (where appropriate).

    The program was delayed in 2020–21, as 60% of clients requested their engagement with us to be put on hold due to COVID-19. These engagements have since re-commenced. For those engagements that have now finalised:

    • 9 clients reached an overall medium or high level of GST assurance
    • 5 clients received very low GST assurance.

    The clients that received a very low level of assurance did not receive GST assurance across the areas reviewed, and had significant weaknesses in their GST governance framework.

    Where weaknesses in clients’ GST governance frameworks were noted, we provided recommendations to address the following areas:

    • improvements in documented BAS procedures
    • implementation of a business recovery plan and resumption plan
    • reconciliation of the statistical data between the BAS, income tax return and financial statements
    • improved internal controls for unrestricted employee access to IT systems.

    By providing these recommendations and assurance determinations we have sought to influence clients and improve the integrity of the GST system.

    We have also recently published our first Findings report from the Top 500 tax performance program, that provides further detailed information about our findings and observations more broadly about tax governance in Top 500 private groups.

    Prosecutions and investigations

    It is the responsibility of the ATO to protect the GST system against fraud and related crimes. Our firmest strategies to deal with fraudulent behaviour are criminal investigations and prosecutions. Criminal investigations and prosecutions are complemented by a communication strategy to maximise the impact of cases prosecuted. This increases the community awareness of the impact of non-compliance with tax obligations and is a general deterrence for others not lodging BAS and defrauding the system by making false and misleading claims and statements.

    The ATO prosecutes matters such as:

    • not complying with BAS lodgment requirements
    • making false and misleading statements
    • keeping false records
    • not complying with notices issued by the ATO requiring the provision of information, documents or attendance at an interview.

    Activities in 2020–21 included:

    • completion of 35 GST-related criminal investigations
    • referral of GST-related briefs of evidence for breaches of the Criminal Code Act 1995 to the Commonwealth Director of Public Prosecutions (CDPP), resulting in 7 successful prosecutions that included fines, reparation orders and prison sentences ranging from 2–5 years
    • issuance of 13 warning letters; these are used as a risk treatment option to avoid unnecessary court action where alternative treatment strategies are available.
    Table 18: GST investigations and prosecution results

     

    2016–17

    2017–18

    2018–19

    2019–20

    2020–21

    GST-related investigations – completed (number)

    82

    75

    59

    36

    35

    GST-related fraud prosecution cases resulting in conviction (number)

    15

    14

    27

    15

    7

    Total successful GST outcomes – Taxation Administration Act matters only (number)

    1,095

    985

    618

    328

    94

    Costs and fines ($m)

    8.9

    8.0

    6.1

    2.3

    0.9

    The matters referred to the CDPP cover a range of complex GST risks involving various business structures, and can involve multiple suspects and witnesses. In 2020–21, we observed opportunistic and recidivist behaviours, and therefore our focus was to prevent and deter suspected recidivist taxpayers from committing further GST offences.

    We continue to work closely with the CDPP to deliver quality briefs and provide support to requisitions and the prosecution process. There were 35 criminal investigation briefs referred to the CDPP, with most of the cases already progressed to charges laid and in the process of court prosecution.

    The 2020–21 year saw investigations and prosecutions continue to be impacted by COVID-19. Work commitments under the normal environment were hampered by the inability to see witnesses to:

    • take witness statements
    • undertake records of interview
    • execute search warrants (which are mandatory requirements in the criminal process for preparing a brief of evidence).

    There was also reduced support from state and federal law enforcement agencies for our operational activities. In some regions, prosecution outcomes were delayed due to:

    • applications to adjourn court matters as and when immediate lockdowns were announced
    • the inability of the courts to empanel jury members to conduct trials for relevant hearings.

    Prosecution cases of note:

    • A person was sentenced to 5 years jail with a non-parole period of 3 years. Were it not for a guilty plea, the person would have received a sentence of 6 years and 9 months, and a non-parole period of 4 years and 6 months. This was a joint Australian Federal Police and ATO investigation into fraudulently obtained GST refunds of $3 million, and attempts to fraudulently claim refunds worth an additional $11 million.
    • A deregistered tax agent lodged 50 false BAS on behalf of clients and re-routed the refunds to their own bank account. Further refunds were stopped during pre-issue audits. The tax agent was sentenced to 2 years jail on 2 charges, with a non-parole period of 2 months, and released on a 2-year good behaviour bond.
    • A tax agent was convicted on 13 charges against section 8C of the Taxation Administration Act 1953 in their capacity as a company director and was fined $11,850. The magistrate in this case made the following comments: “a sophisticated businessperson such as the defendant should have been alerted to the issue of lodging and secondly, there are statutory duties which the defendant would have been well and truly aware of due to her qualifications and extensive experience as a tax agent”. The defendant’s actions were unprofessional and unwise to the extent the tax agent relied upon friendship and personal relationships. The court was satisfied there was a high level of personal culpability in the case.
    • A director of a company was found guilty of dishonestly obtaining a financial advantage by deception from a Commonwealth entity, contrary to s 134.2(1) of the Criminal Code, lodging BAS for 2 quarters: The March 2015 quarter where he received a refund of $80,000, and the June 2015 quarter, where he received a refund of $44,000. He was ordered to be released on entering a recognisance order of the sum of $10,000 to be on good behaviour for 18 months. Further, the court ordered him to pay back to the ATO a total of $124,000.
      Last modified: 07 Feb 2022QC 67817